Image source: Netflix.
What: Netflix (NFLX 4.17%) shares rose 13.9% in May 2016, according to data from S&P Global Market Intelligence. Stop me if you've heard this before: Most of this surge rested on buyout speculation. In particular, a lot of people are thinking that Apple (AAPL 0.64%) should pick up the digital video veteran.
So what: This time, the rumor mill was spun up by Financial Times, claiming to have anonymous insider sources with access to Apple's media buyout plans. According to the newspaper, Apple really wanted to bolster its decrepit in-house content production by picking up Time Warner division HBO, but that idea fell through.
It's important to note that even Financial Times' sources didn't actually say that Cupertino is negotiating a deal with Netflix, or even sending out serious feelers. Instead, these insiders noted that Apple was likely to stretch for another established media production giant now that HBO is off the table -- and Netflix was mentioned as a potential target.
Now what: I think it's pretty clear that these buyout rumors walk on thin ice. It is true that Apple desperately needs to become a media producer in order to stay relevant in the evolving entertainment and consumer electronics markets. Owning something like HBO would give Apple the keys to the media castle, and it isn't easy to simply bootstrap a successful media studio out of thin air and a few billion dollars.
Netflix has already done the hard work of building a media brand, backed by Golden Globes and Emmy awards as well as strong consumer interest. I would love to say "strong viewership numbers" here, but Netflix makes it a point not to share that kind of data. We'll just have to assume that a lot of people are interested, based on the fact that they keep signing up for the service in droves.
Given all of these pro-merger factors, why am I so skeptical that Apple really wants to own Netflix?
For one, it would have to be a deal of epic proportions even for one of the planet's largest and richest companies. Netflix commands an enterprise value north of $42 billion today, and that's before applying a reasonable buyout premium. Apple can't expect to toss out a lowball offer for enthusiastic shareholder approval. Shareholders won't forget that the stock more than doubled in 2015. Netflix is also setting itself up for plenty of long-term earnings growth right now.
Image source: Netflix.
The two companies run very different corporate cultures, inside and out. The only thing they really have in common is a deep love of proprietary business data. Beyond that, Netflix is still a hungry, risk-taking start-up with a keen focus on rapid expansion and cutting-edge technology development. This company is building a brand-new media industry around itself, on a global scale. Apple is content to chase the same basic mobile computing idea from slightly different angles -- iPhone, iPad, Apple Watch, perhaps a homegrown car design someday. The approach has worked before, so why can't it just keep delivering results forever?
That dichotomy is a story for another day, but it is obvious that these two companies were born with incompatible blood types. If Cupertino swallows Netflix this summer, the corporate body would most likely reject it in a couple of years with little to show for a likely more than $60 billion investment. That's not a good idea for anyone involved.
Apart from this silly Apple speculation, investors were also reminded that Netflix signed a wide-ranging distribution deal with Walt Disney four years ago, and we will see the fruits of that agreement this September. Again, this is very old news but a lot of investors seem to have forgotten all about the Disney deal.
So there you have it, folks. Netflix had a great month in May, thanks to a combination of weak merger rumors and that long-forgotten Walt Disney deal. As a shareholder, I'd prefer to see my largest stock holding rise on beefier news. No matter -- the long-term magic is not going away. And nobody ever complained about a 14% value boost, regardless how silly the underlying reasons might be.
